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ABSTRACT
Innovation development, production, distribution and consumption
networks can be built up horizontally with actors consisting only of
innovation users (more precisely, user/self-manufacturers). Free and
open source software projects are examples of such networks, and
examples can be found in the case of physical products as well.
User innovation networks can function entirely independently of
manufacturers when (1) at least some users have sufficient incentive to
innovate, (2) at least some users have an incentive to voluntarily reveal
their innovations, and (3) diffusion of innovations by users is low cost and
can compete with commercial production and distribution. When only the
first two conditions hold, a pattern of user innovation and trial and
improvement will occur within user networks, followed by commercial
manufacture and distribution of innovations that prove to be of general
interest. In this paper we explore the empirical evidence related to each of
these matters and conclude that conditions favorable to user innovation
networks are often present in the economy.
can exist within the boundaries of a membership group but need not. User innovation
networks also may, but need not, incorporate the qualities of user communities for
participants, where these are defined as networks of interpersonal ties that provide
sociability, support, information, a sense of belonging, and social identity. (Wellman 2002 p.
4).
It is our contention that complete fully-functional innovation networks can be built
up horizontally with actors consisting only of innovation users (more precisely, user/selfmanufacturers). Users participating in the network design and build innovative products
for their own use and also freely reveal their designs to others. Those others then replicate
and improve the innovation that has been revealed and freely reveal their improvements in
turn or they may simply replicate the product that has been revealed and adopt it for their
own, in-house use.
In the real world, of course, non-users also may contribute to what we are calling
user innovation networks. For example, in the case of open source software innovation
networks, manufacturers of complementary goods and purveyors of complementary services
can be motivated to contribute, if and as the innovations they freely reveal enhances profits
from what they sell (Harhoff et al 2002). Also, computer programmers that have no use for
the software they are developing may contribute, driven by enjoyment of the work itself,
reputation effects, etc. (Lerner and Tirole, 2002). It is only our contention that such nonusers are not essential, and that horizontal, distributed innovation networks containing user
participants only can be fully functional.
Specifically, we propose that user-only innovation development, production,
distribution and consumption networks can flourish when (1) at least some users have
sufficient incentive to innovate, (2) at least some users have an incentive to voluntarily reveal
their innovations, and (3) diffusion of innovations by users is low cost and can compete with
commercial production and distribution. When only the first two conditions hold, we
propose that a pattern of user innovation and trial will occur within user networks, followed
by commercial manufacture and distribution of innovations that prove to be of general
interest. In this paper we will explore these matters and will attempt to show that conditions
favorable to user innovation networks often do exist in the real world economy.
mid-air because there was no way to keep the board with you and as a
result you hurt your feet, your legs, and the board.
Then I remembered the Chip, a small experimental board we had built
with foot straps , and thought "its dumb not to use this for jumping." That's
when I first started jumping with foot straps and discovering controlled
flight. I could go so much faster than I ever thought and when you hit a
wave it was like a motorcycle rider hitting a ramp; you just flew into the air.
All of a sudden not only could you fly into the air, but you could land the
thing and not only that, but you could change direction in the air!
The whole sport of high performance windsurfing really started from that.
As soon as I did it, there were about 10 of us who sailed all the time together
and within one or two days there were various boards out there that had foot
straps of various kinds on them and we were all going fast and jumping
waves and stuff. It just kind of snowballed from there." (ibid p. 14-15)
By 1998 more than a million people were engaged in windsurfing and a large fraction
of the boards sold incorporated the user-developed innovations for the highperformance sport.
Both of these user innovation networks have evolved and become more complex
over time. Today, although they look different on the surface, they are in fact very similar in
fundamental ways. Both now include many thousands of volunteer participants.
Participants in open source software projects interact primarily via the Internet using
specialized websites that volunteer users have set up for their use. Participants in sports
innovation networks tend to interact by physically traveling to favorite sports sites and to
contests designed for their sport. Most users of open source software simply use the
code, relying on interested volunteers to write new code, debug others' code, answer
requests for help posted on Internet help sites, and help coordinate the project. Similarly,
most participants in an evolving sport simply play the game, relying on those so inclined to
develop new techniques and equipment, try out and improve innovations developed by
others, voluntarily provide coaching, and help coordinate network activities such as leagues
and contests. Participants that do innovate tend to freely reveal their innovations to all
participants, including free riders.
Often, commercial enterprises attach to or assume complementary roles to user
innovation networks. Red Hat and VA Software are well-known examples of commercial
involvement in the open source software context; professional sports leagues and
commercial producers of sports equipment are examples in the case of sports.
5
In the remainder of this paper we will explore the phenomenon of and the
economics of user-only innovation networks by first reviewing what is known about
innovation by users (section 2). Next, we will explore what is known about the free
revealing of innovations by users (section 3) and about the low-cost diffusion of userdeveloped innovations to other users and to manufacturers as well (section 4). Finally, we
discuss some implications of horizontal, distributed innovation networks by and for users
themselves (section 5).
2.0 Innovation by users
Innovation manufacturers rather than innovation users have traditionally been
considered the most logical locus of innovation for products and services, because private
financial incentives to innovate seem to be higher for them than for individual or corporate
users. After all, a manufacturer has the opportunity to sell what it develops to an entire
marketplace of users while spreading development costs over a large number if units sold. A
user-innovator, on the other hand, can typically expect to benefit financially only from its
own internal use of its innovation. Benefiting from diffusion of an innovation to other users
in a marketplace has been traditionally assumed to require some form of intellectual property
protection followed by licensing. Both matters are costly to attempt, with very uncertain
outcomes.
Despite this traditional expectation, empirical studies of the sources of innovation in
both industrial and consumer goods fields have shown that in many but not all of the fields
studied, users rather than manufacturers are typically the initial developers of what later
become commercially significant new products and processes (table 1).
In the specific case of open source software projects, software users also appear to
be frequent probably the most frequent contributors of software code. Thus, Niedner et
al (2000) report that contributors of code to open source projects asked to agree or disagree
with statements regarding their possible motivations for this ranked gain from facilitating
my work due to better software as the highest-ranked benefit (average level of respondent
agreement with that statement was 4.7 on a scale of 5). Similarly, 59% of contributors to OS
projects sampled by Lakhani and Wolf (2002) report that use of the output they create is one
of the three most important incentives inducing them to innovate.
Innovative
Product Developed by: a
User
Mfr.
143
18
25%
33%
75%
67%
Enos (1962)
43%
14%
Freeman (1968)
810
70%
30%
Berger (1975)
0%
100%
Boyden (1976)
16
0%
100%
Lionetta (1977)
13
85%
15%
Shah (2000)
3
45
100%
58%d
0%
27%
4
44
63
100%
82%
70%
0%
18%
30%
7
22
20
100%
63%
59%
0%
21%
29%
16% e
12% e
20
11%
33%
56% f
Knight (1963)
VanderWerf (1982)
Other
43%b
0%
15%
Studies that have examined the frequency of innovation among user populations
have found that user innovation is not a rare event: from 10% to over 30% of user
respondents report developing a new product for personal or in-house use in fields studied
to date (table 2).
Table 2: Proportion of users innovating in five product categories
Innovation Area
% Developing and
building innovation for
own use
Industrial Products
Printed Circuit CAD
Software (a)
24.3%
Yes
74
Pipe hanger installation
firms
102 Australian Libraries
using computerized library
information systems
36%
NA
26%
Yes
9.8%
Yes
37.8%
Yes
19.2%
Yes
Sources of Data: (a) Urban and von Hippel (1988); (b) Herstatt and von Hippel (1992); (c) Morrison, Roberts and
von Hippel (2000); (d) Luthje (2000); (e) Franke and Shah (2002); (f) Luthje, Herstatt and von Hippel (2002).
Finally, as can be seen in table 2, empirical studies find that innovation by users tends
to be concentrated among lead users of those products and processes. Lead users are
defined as users of a given product or service type that combine two characteristics: (1) lead
users expect attractive innovation-related benefits from a solution to their needs and so are
motivated to innovate, and (2) lead users experience needs that will become general in a
marketplace, but experience them months or years earlier than the majority of the target
Attributed to connector suppliers. Suppliers are an additional functional locus of innovation not
discussed in the text. Suppliers expect to profit from an innovation from increased sales of an unchanged
innovation-related input or complementary asset associated with the production or use of that innovation. As
an example of a supplier-developed innovation, consider development of an improved oil lamp by an oil
company that neither wants to use or sell that innovative product. Instead, it expects to profit from increased
sales of oil resulting from the production and use of the innovative lamp by others.
f
market (von Hippel 1986). Note that lead users are not the same as early adopters of an
innovation. They are typically ahead of the entire adoption curve in that they experience
needs before any responsive commercial products exist and therefore often develop their
own solutions.
2.1 Economics of innovation by users
We have now seen that users do often innovate. Presumably therefore, some users,
at least some of the time, must expect innovation to be profitable. Research on innovationrelated incentives and capabilities provides a theoretical basis for the empirical observations
regarding innovation by users in general and by lead users in particular. With respect to
innovation by users rather than manufacturers, it has been shown that in some product
categories users may reasonably expect a higher reward from innovating than can
manufacturers. For example, if a user firm develops a new process machine for in-house use
that enables it to produce a major new product line, and keeps its innovation secret while
benefiting from it, it may make more profit from that machine than would a manufacturerinnovator that must reveal the machine in order to sell it (von Hippel 1988).
Second, user innovation costs can be significantly lower than manufacturer
innovation costs when the problem-solving work of innovation developers requires access to
sticky3 costly to transfer - information regarding user needs and the context of use.
Such information is located predominantly at user sites and can be most cheaply accessed by
problem-solvers located at those sites (von Hippel 1994). Ogawa (1997) has shown that the
location of sticky information drawn upon by problem-solvers can significantly affect the
locus of innovation. Riggs and von Hippel (1994) have shown that functionally novel
innovations (which logically are those likely to draw upon a greater proportion of sticky user
information) are significantly more likely to be developed by users rather than by
manufacturers.
The stickiness of a given unit of information in a given instance is defined as the incremental expenditure
required to transfer that unit of information to a specified locus in a form useable by a given information
seeker. When this cost is low, information stickiness is low; when it is high, stickiness is high. A number of
researchers have both argued and shown that information required by technical problem-solvers is indeed
often costly to transfer for a range of reasons (von Hippel 1994). The requirement to transfer information
from its point of origin to a specified problem-solving site will not affect the locus of problem-solving activity
when that information can be shifted at no or little cost. However, when it is costly to transfer from one site
to another in useable form - is, in our terms sticky - the distribution of problem solving activities can be
significantly affected.
3
The impact of these two factors on the locus of innovation also allows us to
understand and predict that user innovation will not be present or frequent in product
categories such as engineering plastics (c.f. table 1). Engineering plastics are typically a
lower-cost substitute for other engineering materials a user is seldom prevented from
implementing a desired innovation for lack of a novel engineering plastic. Also, sticky
information regarding user needs is not an issue with respect to the development of new
engineering plastics: manufacturer-innovators know they will obtain success in the
marketplace if they can achieve improvements along dimensions of merit known to be
valued by users such as cost or strength of materials.
The concentration of innovation activity among lead users within the user
population can also be understood from an economic perspective. Given that innovation is
an economically motivated activity (Schmookler 1966, Mansfield 1968), those users
expecting significantly higher economic or personal benefit from developing an innovation
one of the two characteristics of lead users have a higher incentive to and so are more
likely to innovate. Also, given that lead users experience needs in advance of the bulk of a
target market, the nature, risks, and eventual size of that target market are often not clear to
manufacturers. This lack of clarity can reduce manufacturers incentives to innovate, and
increase the likelihood that lead users will be the first to develop their own innovative
solutions for needs that later prove to represent mainstream market demand.
In the specific instance of open source software, software users can profit by using
the software improvements that they develop. In contrast, there is no commercial market
for open source software because open source software developers make their innovations
freely available as a public good. This eliminates manufacturers direct path to appropriating
returns from private investment in developing open source products, and so often eliminates
their incentive to innovate in this arena. (Recall, however that manufacturers may find
indirect paths to profiting from open source software projects and so may contribute to
them. For example, IBM may profit from developing improvements to the open source
program GNU/Linux, if these improvements enhance Linuxs functioning with a
complementary good, such as proprietary computer software or hardware, that IBM does
sell.)
10
11
to fellow innovators and to free riders on equal terms (e.g., Raymond 1999, Lerner and
Tirole 2000).
Free revealing can be the dominant way innovations are diffused in some fields and
under some conditions. Thus, Franke and Shah (2002) studied patterns of user innovation
sharing in four communities of serious sports enthusiasts. Innovators in these communities
quite universally agreed with the statement that they shared their innovation with their entire
community free of charge and strongly disagreed with the statement that they sold their
innovations (p<0.001, t-test for dependent samples) (Table 3).
Table 3: User-developed sports innovations are freely shared within user innovators
sporting communities
Variable a
I share my innovation free of charge within the community
I have sold my innovation to many inside the community
a 7-point rating scale: 1 = very accurate; 7 = not accurate at all); n = 40
High Agreement
66.7%
0.0%
Source: Franke and Shah (2002) table 13. The four sporting communities Franke and Shah studied were
devoted to the recreational practice of their sports at a relatively high level of skill. Each community was
focused on a different sport: sailplaning, canyoning, bordercrossing and cycling by handicapped athletes.
One hundred and ninety seven participants responded to a questionnaire, with 37.8% reporting creating
new or improved equipment for the practice of their sport (c.f. table 1).
12
obtainable from licensing or secrecy, then free revealing will be the preferred course of
action for a profit-seeking firm.
13
Hollander coded a technical change as major if its development was considered difficult to accomplish
by men skilled in the pertinent arts before the development program. He coded a technical change as
minor if its development was judged a relatively simple process. Usually, a minor technical change involved
evolutionary alteration in existing techniques whereas a major change involved a significant departure from
existing methods. (1965, pp. 195-6)
6
14
Possibly the rarity with which user-innovators were observed to adopt the role of manufacturer in the case
of industrial goods innovations versus sporting goods will prove linked to the level of investment that userinnovators have sunk into the effective performance of their existing user roles and the continuing
opportunities and interest that they see in continuing these. The user-innovators reported on in von Hippel
(1988, case history appendix) tended to be accomplished scientists and engineers employed by firms and
universities. In contrast, the user-innovators studied by Shah (2000) tended to be young people who were
dedicated to a sport (similar to ski bums) and who did not yet have a paying job.
8 In addition, a user-innovator may not be the only holder of its secret. Note in this regard that Rosenberg
(1976) has shown that important innovations often come from outside of the industry of application. When
this is so, and when innovations diffuse from one industry to another with a lag, it is likely that competing
firms in the originating industry all will know the information and so incur no competitive loss relative to their
rivals by revealing it to firms in other industries.
If research shows that an innovators secret information is also frequently know by others, then all must
estimate that the actual likelihood of keeping the information secret depends on the choice made by the
possessor with the least to lose (or most to gain) from revealing it. If a holder of the secret judges that other
possessors are likely to reveal it if they dont, any preference that they might have to hide their information is
rendered moot.
16
17
competitive advantage that the innovator incurs by revealing. Conversely, when competition
between innovation users is low, e.g. due to geographical separation of markets, the revealing
user does not suffer as a consequence of the advantages he provides to others.
The effect of competition on willingness to free reveal has recently been documented
by Franke and Shah (2002) in their study of four communities of sports enthusiasts
mentioned previously. They report that 2 of the 4 communities studied were less
competitive, having more an emphasis on joint experience and enjoyment; two were more
competitive, having more a focus on relative performance and contests. One hundred and
ninety seven participants responded to a questionnaire, with 37.8% reporting creating new or
improved equipment for their sport (c.f. table 1). They found that a statement regarding free
revealing of innovations (I shared the innovation free of charge within the community was
significantly less agreed with by innovating members of the more rivalrous communities than
by innovators within the less rivalrous communities (n = 40, p < .001). They also found that
assistance provided by one community member to another during the innovation
development process was significantly less within the more competitive communities (n =
191, p < .01).
Free revealing in the absence of competition has been explored by Morrison et al
(2000). These authors studied innovation sharing by Australian libraries that had made
innovative modifications to their computerized library information systems (OPACs). The
libraries studied were not competitors in the marketplace: all were non-profit organizations
and, although their budgets were probably partially determined by the number of patrons
they attracted, they served markets that were non-overlapping with respect to geographic
coverage and/or subject matter. Morrison et al found that users had shared 56% (22 of the
39) of the OPAC modifications they had developed with manufacturers and/or or users.
Forty four percent had not been shared.
The relationship of three variables to user innovation sharing were explored. The
first involved the cost of transferring information on user-developed OPAC modifications.
These are likely to be relatively minor in any case at most involving providing a copy of
user-developed software code plus some informal consulting by staff from the innovating
library. However, it was reasoned that pre-existing membership in a manufacturersponsored users group should lower this cost still further user-members would have a
convenient forum in which to announce and describe their innovations to fellow users and
19
to the manufacturer of their system. The second factor explored was the possibility that
innovating users would be more likely to undertake the effort to inform other users and/or
manufacturers of an innovation they had developed if they thought that those others would
find it of value. The third factor had to do with the commercial value that manufacturers
saw in each innovation. Manufacturer incentives to encourage the sharing of that
information by users with their own engineers should logically be higher for innovations
perceived as having commercial high value. (The second and third variables are not
independent.)
Table 3: Logit Model of Innovation Sharing
Coefficient Standard Error
User belongs to OPAC user group
2.443
1.148
Manufacturers evaluation of the commercial
0.032
0.018
value of users modifications
Users perception its needs are unique
-0.572
0.304
Constant
-0.780
1.283
23 = 11.03
= 0.28 Classification rate = 78.57%
Source: Morrison et al (2000), table 7
A logit model of the innovation sharing decision incorporating these three variables shows
all to be statistically significant. Further, the model showed a very strong discriminating
ability. It forecast that 10 users would not share their innovations who did not, that 12 users
who did share their innovations would. It predicted only 4 cases of sharing where it did not
occur and 2 cases of not sharing where it did occur. Thus, the overall classification accuracy
was 79%.
4.0 Innovation diffusion by users
Our third and final condition for the emergence and successful functioning of user
innovation networks was that users must somehow be able to diffuse the innovation-related
information that they have freely revealed at a low cost both to themselves and to would-be
adopters. Our reasoning regarding this condition begins by noting that innovators will only
be interested in incurring diffusion costs that can be justified based upon the level of
benefits they will receive from diffusing their innovation. Similarly, adopters will only be
interested in learning about innovations at a cost justified by their expected innovation-
20
related benefits. We have seen in section 2 that innovation streams that have a large
cumulative impact are likely to be made up of relatively small individual innovations
(Hollander 1965, Knight 1963). We have also seen in section 3 that benefits to innovators
from free-revealing, while higher than benefits they could expect from licensing or secrecy,
may well be low. On this basis we speculate that most innovations diffused via a user
innovation network are likely to be of relatively low benefit to both diffusers and adopters,
and so must be diffused at a low cost if they are to be diffused at all.
Kollock (1999) has used similar reasoning to argue that the advent of the Internet
has been a major boon to the development of free and open source software development
projects. As he points out, innovators can diffuse information about their innovative
software programs indeed, can diffuse the innovative programs themselves - very cheaply
via the Internet. Also, costs can be very low for would-be adopters of open source software
programs: they are transmitted in complete and ready-to-use form.
It is important to point out that low cost methods for diffusing innovation-related
information exist in many fields that are not dependent on the Internet and that long predate
it. Consider that those who share an interest may meet for a range of purposes such as
conferences and contests. As a result, information diffusion costs in many fields are
episodically very low, and innovators can store their innovations for occasional batch
networking and diffusion at low incremental cost, the cost of coming to such a meeting
having already been incurred. In these face-to-face settings, some information transfers are
easily effected that would be difficult to transact over the Internet. As an example, consider
again the high performance windsurfing innovation interview we quoted from at the start of
this article. In that case fellow windsurfing enthusiasts gathered at an Hawaiian beach for a
windsurfing contest. While there, they could transfer complex, poorly-encoded information
in very low-cost, multimedia manner: Watch how I do this, and Run your hand along this
curve I sanded into my surfboard I think it makes all the difference for doing the type of
flip I just showed you! Try it yourself while I watch and comment.
Finally, note that user innovation networks involving the production and diffusion of
working copies of innovations as opposed to information about them - are possible only
when self-manufacture and/or distribution of innovative products directly by users can
compete with commercial production and distribution. In the case of open source software
this is possible because innovations can be produced and distributed essentially for free on
21
the web, software being an information rather than a physical product. In the case of the
sports innovation example, however, equipment (but not technique) innovations are
embodied in physical product that, to achieve general diffusion, must be produced and
physically distributed. These activities generally involve significant economies of scale. The
result, in the case of the windsurfing example and for physical products generally, is that,
while innovation prototyping and field trial and refinement can be carried out by users and
within user innovation networks, production and diffusion of the physical products
incorporating those innovations will usually be carried out by manufacturing firms.
5.0 Discussion and suggestions for further research
We have now seen that conditions favorable to horizontal, user innovation networks
may exist in many fields. That is: users do frequently innovate in many fields, and these
users appear to often have the incentives to freely reveal and low-cost means for doing so.
Recall that in this paper we have focused on exploring why users in particular might
innovate and then freely reveal their proprietary information on user innovation networks
rather than attempt to hide or license that information. We have adopted this relatively
narrow focus because it seems to us to be interesting and important to explore how and why
innovation networks run exclusively for and by users function. Such networks offer the
interesting prospect of direct user to user innovation processes that can dispense with
manufacturers as intermediaries.
It has been found that when users can innovate for themselves to create precisely
what they want, rather than being restricted to a set of options on offer that have been
created by others, their satisfaction is higher (Franke and von Hippel, 2002). However, the
social welfare benefits of user innovation networks based upon free revealing are not yet
clear and would be a very interesting subject for study. Substitution of user innovation
networks for more traditional manufacturer-user arrangements might increase social welfare
or might only shift the locus of innovation costs rather than reduce them.
In the real world it may turn out that pure user innovation networks are a rarity
and that most will incorporate contributions from manufacturers or material suppliers as
well as users. Manufacturers, as has been mentioned, also have incentives to freely reveal
innovations if this will increase their sales or their profits or increase the value of assets that
they possess. Thus, manufacturers of proprietary computer hardware can have an incentive
22
to create and contribute novel open source software that will improve the link between a
popular open source software program and their proprietary hardware.
The concept of horizontal, user-only innovation networks that we have considered in
this paper can be extended to the more general category of user content networks. As is the
case for user innovation networks, user content networks offer content that users either post
as of interest to others and/or questions that users post to the network for a possible
answer. Such content networks exist in both user-founded and run and commercial forms.
Prominent examples can be found in the medical field in the form of specialized websites
where patients and others are free to both post and download information on specific
medical conditions. Many variations on commercially-supported user content networks also
exist. Zagat.com is a website offering a compilation of restaurant evaluations by ordinary
consumers that can be freely downloaded; Allexperts.com is a website offering free access to
self-described experts who will provide information upon request.
When the service provided by such networks is simply to offer non-proprietary
content in a more convenient and accessible form rather than to diffuse valuable
innovations that have been freely revealed, the arguments for participation by users and
others gets considerably simpler. One need consider only the costs and benefits associated
with diffusion and not issues related to loss of proprietary intellectual property associated
with the free revealing of innovations.
User innovation networks assume various forms, and it will be useful to explore the
conditions appropriate for each, and the costs and benefits that each provide. For example,
as was noted earlier, user innovation networks may, but need not, incorporate the qualities of
user communities for participants, where these are defined as networks of
interpersonal ties that provide sociability, support, information, a sense of belonging, and
social identity. (Wellman 2002 p. 4). Franke and Shah (2002) report that the sports groups
they studied offered the qualities of communities to participants. In contrast, those who
provide or download, for example, novel user-developed statistical techniques to or from a
web page such as the Boston Archive may simply view and use that user network as a simple
tool rather than as a community.
23
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